Chapter 6

AIRPORT FINANCIAL
MANAGEMENT AND PRICING

Photo credit: Federal Aviation Administration

Contents
Page

Approaches to Financial Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . 125

The Residual-Cost Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
The Compensatory Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Comparison of Residual-Cost and Compensatory Approaches . . . . . . . . . . . . . 127
Pricing of Airport Facilities and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Structure and Control of Airport Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Variation in the Source of Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Trends in Airport Management Since Deregulation . . . . . . . . . . . . . . . . . . . . . . . . . 135
Shorter Term Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Modifications of Residual-Cost Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Maximization of Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
List of Tables
Table No.

Page

18. Financial Management of Commercial Airports, 1983 . . . . . . . . . . . . . . . . . . . 126

19. Comparison of Residual-Cost and Compensatory Methods of
Calculating Airport Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
20. Role of Airlines in Approving Capital Projects at
Commercial Airports, 1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
21. Term of Airport Use Agreements at Commercial Airports, 1983 . . . . . . . . . . 130
22. Profile of Landing Fees at Four Major Airports, 1982 . . . . . . . . . . . . . . . . . . . 132
23. Average Operating Revenue by Revenue Source, Commercial and
General Aviation Airports, 1975-76 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

Chapter 6

AIRPORT FINANCIAL
1
MANAGEMENT AND PRICING
Unlike airports in other countries, many of
which are owned and run by national governments, U.S. commercial airports are typically
owned and managed by local governments or
other non-Federal public authorities. Although the
management approach varies, major U.S. commercial airports function as mature enterprises,
applying up-to-date techniques of financial management and administration. These publicly owned
and managed facilities are operated in conjunction with private industry-the commercial airlines, which are the airports link to their patrons.
This peculiar public-private character distinguishes
the financial operation of commercial airports
from that of wholly public or private enterprises,

distinctly shaping airport management practices,

the pricing of facilities and services, and the investment planning process.
On the basis of a survey conducted by the Congressional Budget Office (CBO) in 1983 (app. B),
this chapter develops a profile of financial policies and practices now followed at 60 of the Nations larger commercial airports and assesses
trends in airport financial management since Federal deregulation of the airline industry in 1978.
Brief attention is also given to management and
financing practices of smaller airports, including
publicly owned general aviation (GA) airports.

APPROACHES TO FINANCIAL MANAGEMENT

At most commercial airports, the financial and
operational relationship between the airport operator and the airlines is defined in legally binding
agreements that specify how the risks and responsibilities of running the airport are to be shared.
These contracts, commonly termed airport use
agreements, establish the terms and conditions
governing the airlines use of the airport.2 They
also specify the methods for calculating rates airlines must pay for use of airport facilities and services; and they identify the airlines rights and
privileges, sometimes including the right to approve or disapprove any major proposed airport
capital development projects.
Although financial management practices differ greatly among commercial airports, the air

IThis chapter was prepared by the Congressional Budget Office

and appears in unabridged form in Financing U.S. Airports in the
1980s, April 1984. The version here has been condensed and edited
to conform to the OTA report format.
Airport use agreement is used generically hereto include both
legal contracts for the airlines use of airfield facilities and leases
for use of terminal facilities. At many airports, both are combined
in a single document. A few commercial airports do not negotiate
airport use agreements with the airlines, but instead charge rates
and fees set by local ordinance.

port-airline relationship at major airports typically

takes one of two very different forms, with important implications for airport pricing and investment:
The residual-cost approach, under which the
airlines collectively assume significant financial risk by agreeing to pay any costs of running the airport that are not allocated to
other users or covered by nonairline sources
of revenue.
The compensatory approach, under which
the airport operator assumes the major financial risk of running the airport and charges
the airlines fees and rental rates set so as to
recover the actual costs of the facilities and
services that they use.

The Residual-Cost Approach

A majority of the Nations major commercial
airports surveyed by CBO14 out of 24 large airports and 21 of 36 medium airportshave some
form of residual-cost approach to financial management (see box A and table 18). Under this approach, the airlines collectively assume significant
125.

126 . Airport System Development

Table 18.Financial Management of

Commercial Airports, 1983

Approach

Medium
Large
Number Percent Number Percent

SOURCE: Congressional Budget Office, 1963 Survey.

lustrate the basic approach (see table 19). Most

airports have a number of different cost centers,
such as terminal buildings, the airfield, roads and
grounds, and the air freight area. At a residualcost airport, the total annual costsincluding
administration, maintenance, operations, and
debt service (including coverage) could be calculated for each cost center, and offset by all
nonairline revenues anticipated for that center.3
The residual between costs and revenues would
then provide the basis for calculating the rates
charged the airlines for their use of facilities within
the cost center. Any surplus revenues would be
credited to the airlines and any deficit charged to
them in calculating airline landing fees or other
rates for the following year.4

The Compensatory Approach

Under a compensatory approach, the airport
operator assumes the financial risk of airport operation, and airlines pay rates and charges equal to
the costs of the facilities they use as determined
by cost accounting. In contrast to the situation
at residual-cost airports, the airlines at a compensatory airport provide no guarantee that fees and
financial risk. They agree to keep the airport
financially self-sustaining by making up any deficitthe residual costremaining after the costs
identified for all airport users have been offset by
nonairline sources of revenue (automobile parking and terminal concessions such as restaurants,
newsstands, snack bars, and the like).
Although applications of the residual-cost approach vary widely, a simplified example can il-

3
Debt service coverage is the requirement that the airports revenues, net of operating and maintenance expenses, be equal to a
specified percentage in excess of the annual debt service (principal
and interest payments) for revenue bond issues. The coverage required is generally from 1.25 to 1.40 times debt service, thereby providing a substantial cushion that enhances the security of the bonds.
This is discussed further in ch. 7.
4
Haro1d B. Kluckholn, Security for Tax-Exempt Airport Revenue
Bonds, summary of remarks presented at the New York Law Journal
Seminar on Tax-exempt Financing for Airports, 1980.

Ch. 6Airport Financial Management and Pricing . 127

rents will suffice to allow the airport to meet its

annual operating and debt service requirements.
A compensatory approach is currently in use at
10 of the 24 large commercial airports and 15 of
the 36 medium airports surveyed by CBO.
Although individual airports have adopted
many versions of the compensatory approach, the
simplified example set out in table 19 illustrates
the basics. First, for each cost center a calculation would be made of the total annual expense
of running the center, including administration,
maintenance, operations, and debt service (with
coverage). The airlines shares of these costs would
then be based on the extent of their actual use of
facilities within each cost center. The airlines
would not be charged for the costs of public space,
such as terminal lobbies. Nor would they receive
any credit for nonairline revenues, which offset
expenses in the residual-cost approach but are disregarded under a compensatory approach in calculating rates and charges to the airlines.

Comparison of Residual-Cost and

Compensatory Approaches
These two major approaches to financial management of major commercial airports have sig-

nificantly different implications for pricing and

investment practices. In particular, they help determine:

an airports potentiaI for accumulating retained earnings usable for capital development;
the nature and extent of the airlines role in
making airport capital investment decisions,
which may be formally defined in majorityin-interest clauses included in airport use
agreements with the airlines; and
the length of term of the use agreement between the airlines and the airport operator.

These differences, examined below, can have

an important bearing on an airports performance
in the municipal bond market, as will be discussed
in chapter 7.

Retention of Earnings
Although large and medium commercial airports generally must rely on the issuance of debt
to finance major capital development projects, the
availability of substantial revenues generated in
excess of costs can strengthen the performance of
an airport in the municipal bond market. It can
also provide an alternative to issuing debt for the

128

Airport System Development

financing of some portion of capital development.

Residual-cost financing guarantees that an airport
will always break even thereby assuring service without resort to supplemental local tax supportbut it precludes the airport from generating earnings substantially in excess of costs. 5
By contrast, an airport using a compensatory
approach lacks the built-in security afforded by
the airlines guarantee that the airport will break
even every year. The public operator undertakes
the risk that revenues generated by airport fees
and charges may not be adequate to allow the airport to meet its annual operating costs and debt
service obligations. On the other hand, because
total revenues are not constrained to the amount
needed to break even, and because surplus revenues are not used to reduce airline rates and
charges, compensatory airports may earn and retain a substantial surplus, which can later be used
for capital development. Since the pricing of airport concessions and consumer services need not
be limited to the recovery of actual costs, the
extent of such retained earnings generally depends
on the magnitude of the airports nonairline
revenues. b
Because the residual-cost approach is not designed to yield substantial revenues in excess of
. . -Peat, Marwick, Mitchell & Co., Comparative Rate Analysis:
Dade County Aviation and Seaport Departments, August 1982,
p. 3.
Market pricing of concessions and other nonairline sources of
revenue is a feature of both residualcost and compensatory airports.

costs, residual-cost airports, as a group, tend to

retain considerably smaller percentages of their
gross revenues than do compensatory airports.
A few residual-cost airports, however, have modified the approach to permit accumulation of sizable retained earnings for use in capital projects.
At Miami and Reno International Airports, for
example, certain airport-generated revenues are
excluded from the revenue base used in calculating the residual cost payable by the airlines; the
revenues flow instead into a discretionary fund
that can finance capital development projects.

Majority=in-interest
In exchange for the guarantee of solvency, airlines that are signatory to a residual-cost use
agreement often exercise a significant measure of
control over airport investment decisions and
related pricing policy. These powers are embodied
in so-called majority-in-interest clauses, which are
a much more common feature of airport use
agreements at residual-cost airports than at airports using a compensatory approach (see table
20). At present, more than three-quarters of the
large commercial airports using a residual cost approach have some form of majority-in-interest
clause in their use agreements with the airlines,
and two-thirds of the medium residual-cost airports have such clauses. Of the airports surveyed,
only one-tenth of the large and one-third of medium commercial airports that use a compensatory approach to financial management have
majority-in-interest clauses in their use agreements.

Table 20.Role of Airlines in Approving Capitai Projects at

Commercial Airports, 1983

Airline role

Large
Percent
Number

Medium
Number
Percent

Residual cost

Majority-in-Interest clause . . . . . . . . . . . . 11
No formal requirement of
airline approval . . . . . . . . . . . . . . . . . . .
3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

79

14

67

21
100

7
21

33
100

10

33

90
100

10
15

67
100

36

Compensatory

Majority-in-Interest clause . . . . . . . . . . . .
1
No formal requirement of
airline approval . . . . . . . . . . . . . . . . . . .
9
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Grand total . . . . . . . . . . . . . . . . . . . . . 24

Ch. 6Airport Financial Management and Pricing

Majority-in-interest clauses give the airlines

accounting for a majority of traffic at an airport
the opportunity to review and approve or veto
capital projects that would entail significant increases in the rates and fees they pay for the use
of airport facilities. 7 This arrangement provides
protection for the airlines that have assumed financial risk under a residual-cost agreement by
guaranteeing payment of all airport costs not covered by nonairline sources of revenue. For instance, without some form of majority-in-interest
clause, the airlines at a residual-cost airport could
be obligating themselves to pay the costs of asyet-undefined facilities that might be proposed in
the 15th or 20th year of a 30-year use agreement.
Under a compensatory approach, where the airport operator assumes the major financial risk of
running the facility, the operator is generally freer
to undertake capital development projects without consent of the airlines that account for a majority of the traffic. Even so, airport operators
rarely embark on major projects without consulting the airlines that serve the airport. Potential investors in airport revenue bonds would be
wary of a bond issue for a project lacking the airlines approval.
Specific provisions of majority-in-interest clauses
vary considerably. At some airports, the airlines
that account for a majority of traffic can approve
or disapprove all major capital development
projectse.g., any project costing more than
$100,000. At others, projects can only be deferred
for a certain period of time (generally 6 months
to 2 years). Although most airports have at least
a small discretionary fund for capital improvements that is not subject to majority-in-interest
approval, the general effect of majority-in-interest
provisions is to limit the ability of the public airport owner to proceed with any major project opposed by the airlines. Sometimes, a group of just
two or three major carriers can exercise such
control.

The combination of airlines that can exercise majority-in-interest

powers varies. A typical formulation would give majority-in-interest
powers to any combination of more than so percent of the scheduled
airlines that landed more than 50 percent of the aggregate revenue
aircraft weight during the preceding fiscal year (standard document
wording).

129

Term of Use Agreement

At the airports examined in the CBO study,
residual-cost airports typically have longer term
use agreements than do compensatory airports.
This is because residual-cost agreements historically have been drawn up to provide security for
long-term airport revenue bond issues; and the
term of the use agreement, with its airline guarantee of debt service, has generally coincided with
the term of the revenue bonds. More than 90 percent of the large and 75 percent of the medium
residual-cost airports surveyed by CBO have use
agreements with terms of 20 or more years (see
table 21). Terms of 30 years or longer are not uncommon.
By contrast, about 60 percent of the large and
40 percent of the medium compensatory airports
surveyed have use agreements running for 20
years or more. Four of the compensatory airports
surveyed have no contractual agreements whatever with the airlines. At these airports, rates and
charges are established by local ordinance or
resolution. This arrangement gives airport operators maximum flexibility to adjust their pricing
and investment practices unilaterally, without the
constraints imposed by a formal agreement negotiated with the airlines, but it lacks the security provided by contractual agreements.

Pricing of Airport Facilities

and Services
Major commercial airports are diversified enterprises - that provide a wide range of facilities and
services for which fees, rents, or other user charges
are assessed. Most commercial airports, regardless
of size, type, or locale, offer four major types of
facilities and services:
airfield facilities, made up of runways, taxiways, aprons, and parking ramps for use by
commercial and general aviation;
terminal area facilities and services provided
to concessionaires and consumers, including
auto parking and ground transportation,
restaurants and snack bars, specialty stores
(e.g., newsstands and duty-free shops), car
rental companies, passenger convenience facilities (e.g., porter service, restrooms, telephones, and vending machines), personal

.
130 . Airport System Development

Table 21.Term of Airport Use Agreements at Commercial Airports, 1983

Length of term

Large
Percent
Number

Residual cost
20 years or more. . . . . . . . . . . . . . . . . . . . 13

0
11-19 years. . . . . . . . . . . . . . . . . . . . . . . . .
0
6-10 years . . . . . . . . . . . . . . . . . . . . . . . . . .
1
5 years or less. . . . . . . . . . . . . . . . . . . . . .
0
Negotiations in process . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
compensatory
6
20 years or more . . . . . . . . . . . . . . . . . . . .
o
11-19 years.... . . . . . . . . . . . . . . . . . . . . .
1
6-10 years . . . . . . . . . . . . . . . . . . . . . . . . . .
0
5 years or less..... . . . . . . . . . . . . . . . . .
3
No use agreements . . . . . . . . . . . . . . . . .
0
Negotiations in process . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Grand total . . . . . . . . . . . . . . . . . . . . .

24a

Medium
Number
Percent
76
10
5
o
10
100

16
2

93
0
0
7
0
100

:
2
21

60
0
10
0
30
0
100

6
2
2
3
1
1
15

36b

40
13
13
20
7
7
100

ports decrease in size, and many of the smallest

do not generate sufficient revenue to cover their
operating costs, much less capital investment.
Among GA airports, those that lease land or facilities for industrial use generally have a better
chance of covering their costs of operation than
do those providing only aviation-related services
and facilities.l
The combination of public management and
private enterprise uniquely characteristic of the
financial

operation

of

commercial

airports

is

reflected in the divergent pricing of airport facilities and services. The private enterprise aspects

of airport operation the services and facilities

furnished for nonaeronautical usegenerally are
priced on a market pricing basis. On the other
hand, the pricing of facilities and services for airlines and other aeronautical users is on a costrecovery basis, either recovery of the actual costs
of the facilities and services provided (the compensatory approach) or recovery of the residual
costs of airport operation not covered by nonairIine sources of revenue. This mix of market pricGround rentals are leases of land in which the lessee pays the
cost of constructing any facilities, such as terminals, upon it.
9
Fixed base operators are private concerns that lease aircraft and
offer aviation services, such as fuel sale, flight instruction, and aircraft maintenance.

OSee Joel Crenshaw and Edmund Dickinson, Investment Needs

and Self-Financing Capabilities: U.S. Airports, Fiscal Years 19811990, report prepared for the U.S. Department of Transportation,
July 1978, pp. 12, 45; and Laurence E. Gesell, The Administration
of Public Airports, Coast Aire Publications, 1981, pp. VI 6-13.

Ch. 6Airport Financial Management and Pricing

ing and cost-recovery pricing has important implications for airport financing, especially with
regard to the structure and control of airport
charges and the distribution of operating revenues,

Structure and Control of

Airport Charges
At major commercial airports, the structure and
control of fees, rents, and other charges for facilities and services are governed largely by a variety of long- and short-term contracts, including
airport use agreements with the airlines, leases,
and concession and management contracts. For
each of the four major groups of facilities and
services outlined above, the basic kinds of charges
assessed at residual-cost and compensatory airports can be compared in terms of:
method of
calculation,
term of agreement, and
frequency of adjustment.

Airfield Area
The major fees assessed for use of airfield facilities are landing or flight fees for commercial
airlines and GA aircraft. Some airports also levy
other airfield fees such as charges for the use of
aircraft parking ramps or aprons. In lieu of landing fees, many smaller airports, especially GA airports, collect fuel flowage fees, which are levied
per gallon of aviation gasoline and jet fuel sold
at the airport.
At residual-cost airports, the landing fee for airlines is typically the item that balances the budget,
making up the projected difference between all
other anticipated revenues and the total annual
costs of administration, operations and maintenance, and debt service (including coverage).
Landing fees differ widely among residual-cost airports, depending on the extent of the revenues
derived from airline terminal rentals and concessions such as restaurants, car rental companies,
and automobile parking lots. If the nonairline
revenues are high in a given year, the landing fee
for the airlines may be quite low. In recent years,
several airportsincluding Los Angeles and Honolulu Internationalhave approached a negative landing fee. At some residual-cost airports,

131

the landing fee is the budget-balancing item for

the airfield cost center only. At such airports, the
surplus or deficit in the terminal cost center has
no influence on airline landing fees, and terminal
rental rates for the airlines may be set on a residual-cost or a compensatory basis.
The method of calculating landing fees at residual-cost airports is established in the airport
use agreement and continues for the full term of
the agreement. To reflect changes in operating
costs or revenues, landing fees are typically adjusted at specified intervals ranging from 6 months
to 3 years. At some airports, fees maybe adjusted
more often if revenues are significantly lower or
higher than anticipated. Often, the nonsignatory
airlines (those not party to the basic use agreement) pay higher landing fees than the signatory
carriers. General aviation landing fees vary greatly
from airport to airport, ranging from charges
equal to those paid by the commercial airlines to
none at all. Most landing fees are assessed on the
basis of certificated gross landing weight.
At compensatory airports, airline landing fees
are based on calculation of the average actual
costs of airfield facilities used by the airlines (see
table 22). As in the case of residual-cost airports,
each airlines share of these costs is based on
its share of total projected airline gross landing
weights (or, in a few cases, gross takeoff weight).
In addition to fees determined by this weightbased measure, three compensatory airports
Boston Logan International and John F. Kennedy
and La Guardia airports in New Yorkassess a
surcharge on GA aircraft during hours of peak
demand. At present, however, no major airports

This practice of basing landing fees on aircraft weight tends to

promote use of commercial airports by general aviation. Since most
GA aircraft are relatively light (under 10,000 lb), they pay very low
landing fees at most commercial airports-typically $10 or less. The
smallest GA aircraft (under 2,500 lb) often pay no fee. Among the
airports surveyed by CBO there is no clear indication that landing
fees for GA differ systematically as a function of pricing policy.
Residual-cost and compensatory airports alike have landing fees for
GA that are so small as to be a negligible, either as a source of
revenue to the airport or as a deterrent to use of congested facilities.

132

Airporf System Development

Table 22.Profiie of Landing Fees at Four Major Airports, 1982

Airline Iandina fee

Basis of fee

Depafiments,

Method of calculation

Feea

Fee = public aircraft facilities costs

divided by total projected scheduled
airline landing weights; adjusted
annually

$1.24

Fee = airfield cost center expenses

divided by total projected airline
landing weights; adjusted annually

$0.34

Fee = residual cost divided by

estimated total landing weights of
all airlines; adjusted semiannually

$0.75

Fee = residual cost divided by

estimated total landing weights of
all airlines; adjusted every 3 years

$0.23

General aviation landing fee

August 1982.

impose such peak-hour surcharges on commercial airlines to help ease congestion problems.1 2
Landing fees at compensatory airports are established either in airport use agreements with the
airlines or by local ordinance or resolution. The
frequency of adjustment of the fees is comparable to that at residual-cost airports.

Terminal Area
The structure of terminal concession and service contract fees is similar under both pricing approaches. Concession contracts typically provide
the airport operator with a guaranteed annual
minimum payment or a specified percentage of

the concessionaires gross revenues, whichever is

greater. Restaurants, snack bars, gift shops, newsstands, duty-free shops, hotels, and rental car
operations usually have contracts of this type.
Terminal concession contracts are often bid competitively, and they range in term from monthto-month agreements to contracts of 10 to 15
years duration. (Hotel agreements generally have
much longer terms, often running for 40 years or
more. ) Airport parking facilities may be operated
as concessions; they may be run by the airport
directly; or they may be managed by a contractor for either a flat fee or a percentage of revenues.

Airline Leased Areas

At both residual-cost and compensatory airports, airlines pay rent to the airport operator for
the right to occupy various facilities (terminal
space, hangars, cargo terminals, and land). Rental
rates are established in the airport use agreements,
in separate leases, or by local ordinance or resolution. Terminal space may be assigned on an exclusive-use basis (to a single airline), a preferential-

Ch. 6Airport Financial Management and Pricing

133

use basis (if a certain level of activity is not maintained, the airline must share the space), or on
a joint-use basis (space used in common by several airlines). Most major commercial airports use
a combination of these methods. In addition, airports may charge the airlines a fee for use of any
airport-controlled gate space and for the provision of Federal inspection facilities required at airports serving international traffic. Some airports
have long-term ground leases with individual airlines that allow the airlines to finance and construct their own passenger terminal facilities on
land leased from the airport.

At compensatory airports, the method of calculating terminal rental rates for the airlines is
based on recovery of the average actual costs of
the space occupied. Each airlines share of the total
costs is based on the square footage leased. Typically, rates differ according to the type of space
and whether it is leased on an exclusive, preferential, or joint-use basis. The rental term for airline leased areas often coincides with that of the
airport use agreement. (It is set by ordinance at
airports that operate without agreements. ) Rates
are typically adjusted annually at compensatory
airports.

Among residual-cost airports, the method of

calculating airline terminal rental rates varies considerably. If airline fees and charges are calculated
on a residual-cost basis within each cost center,
the method of calculating rental rates resembles
that of the simplified example shown in table 19.
To arrive at the airline fee, total nonairline revenues generated within the terminal cost center
are subtracted from the total costs of the center
(administration, operations and maintenance, and
debt service). Each airlines share is based on the
square footage it occupies, with proration of
jointly used space.

Other Leased Areas

On the other hand, at residual-cost airports

where receipts from airline landing fees alone are
used to balance the airport budget, the terminal
rental rates for the airlines may be set in various
wayson a compensatory basis (recovering the
average actual costs of the facilities used), by an
outside appraisal of the property value, or by negotiation with the airlines. In all cases, each airlines share of costs is based on its proportionate
use of the facilities. Rental rates may be uniform
for all types of space leased to the airlines, or they
may differ according to the type of space providedfor example, they may be significantly
higher for leases of ticket counters or office space
than for rental of gate or baggage claim areas.
At residual-cost airports, the rental term for airline leased areas generally coincides with the term
of the airport use agreement with the airlines. The
frequency of adjustment of terminal rental rates
ranges considerablyannually at many airports,
but up to 3 to 5 years at others.

A wide variety of arrangements are employed

for other leased areas at an airport, which may
include agricultural land, fixed base operations,
cargo terminals, and industrial parks. The methods of calculating rental rates and the frequency
of adjustment differ according to the type of facility and the nature of use. What these disparate
rentals have in common is that, like terminal concessions and services, they are generally priced
on a market basis; and the airport managers have
considerable flexibility in setting rates and charges
in the context of market constraints and their own
policy objectives.

Variation in the Source of

Operating Revenues
1n general, revenue diversification enhances the
financial stability of an airport. In addition, the
specific mix of revenues may influence year-toyear financial performance. Some of the major
sources of airport revenue (notably landing fees
and terminal concessions) are affected by changes
in the volume of air passenger traffic, while others
(e.g., airline terminal rentals and ground leases)
are essentially immune to fluctuations in air
traffic.

The distribution of operating revenues differs

widely according to factors such as passenger
enplanements, the nature of the market served,
and the specific objectives and features of the airports approach to pricing and financial management. Airport size generally has a strong influence on the distribution of revenues. The larger

134

Airport System Development

commercial airports typically have a more diversified revenue base than smaller airports. For example, they tend to have a wider array of incomeproducing facilities and services in the passenger
terminal complex. In general, terminal concessions
can be expected to generate a greater percentage
of total operating revenues as passenger enplanements increase. On average, concessions account
for at least one-third of total operating revenues
at large, medium, and small commercial airports,
compared to about one-fifth at very small (nonhub)
commercial airports and a smaller fraction still
at GA airports (see table 23).
Factors other than airport size also affect distribution of operating revenues. At commercial
airports, for example, parking facilities generally
provide the largest single source of nonairline
revenues in the terminal area. Airports that have
a high proportion of connecting traffic may, however, derive a smaller percentage of their operating income from parking revenues than do socalled origin and destination airports. Other factors that may affect parking revenues include
availability of space for parking, the volume of
air passenger traffic, the airport pricing policy,
availability and cost of alternatives to driving to
the airport (e.g., mass transit and taxicab serv-

ice), and the presence of private competitors providing parking facilities at nearby locations off
the airport property.
The approach to financial management, because it governs the pricing of facilities and services provided to airlines, significantly affects the
distribution of operating revenues. Since so many
other factors play an important role in determining revenue distribution, however, the mix of
operating revenues at an airport cannot be predicted on the basis of whether the airport employs
a residual-cost or a compensatory approach. The
mix of revenues varies widely among residual-cost
airports. With airline landing fees characteristically picking up the difference between airport
costs and other revenues at residual-cost airports,
airfield area income differs markedly according
to the extent of the airports financial obligations,
the magnitude of terminal concession income and
other nonairline revenues, and the volume of air
traffic. In 1982, for example, airfield area revenues
provided anywhere from 10 percent (Tampa International) to more than 50 percent (Chicago
OHare International) of total operating revenues
at residual-cost airports. By contrast, compensatory airports show a considerably smaller range
of variation in the distribution of revenues.

Table 23.Average Operating Revenue by Revenue Source, Commercial and Generai Aviation Airports, 1975-76

Ch. 6Airport Financial Management and Pricing

135

TRENDS IN AIRPORT MANAGEMENT SINCE DEREGULATION

FederaI deregulation of the airline industry has
radically changed the market in which airlines
and airports operate. Once subject to strict regulation of routes and fares, commercial air carriers are now free to revise routes, adjust fares,
and introduce or terminate service to particular
airports as market conditions seem to warrant.
This new freedom from Federal intervention has
had pronounced effects on the airline industry.
It has spurred intense competition and even price
wars among the airlines, led to reconfiguration
of the route system, and encouraged the startup
of new carriers. For some of the established airlines, serious financial difficulties have ensued. Although deregulation has not caused radical changes
in the financial management of airports, recent
trends do reflect the uncertainties of a new, open
market. Deregulation also appears to have accelerated certain shifts in management policy and
practice that were under way before deregulation.
Since the early days of commercial air travel,
would-be investors in airport revenue bonds have
held long-term use agreements in high regard, considering them evidence of the airlines commitment
to serve an airport for long periodsspans usually coincident with the terms of bond issues. As
the industry has matured, however, investors and
analysts have increasingly recognized that an airports financial stabilityhence its capacity to
generate a stream of revenue adequate to secure
revenue bond issuesdepends more on the underlying strength of the local air travel market than
on long-term use agreements.
Deregulation has reinforced this shift, as the
strength of the airlines financial commitment to
an airport is significantly diluted by their new flexibility to withdraw from a market virtually at will.
Confidence has also been shaken by the financial
problems now plaguing many airlines. Although
changes in airport financial management occur
very slowly (many standing use agreements run
through the 1990s or later), three important trends
in financial management are now emerging at major commercial airports:

shorter term contractsshorter terms for airport use agreements, nonairline leases, and

25-420 0 - 84

concessionaires contracts, and more frequent

adjustment of rates and charges;

modification of residual-cost approach

modification of residual-cost ratemaking and

majority-in-interest provisions, with movement in the direction of more compensatory
forms of financial management; and
maximization of revenuesconcerted effort
by airport managers to maximize revenues
by means of a variety of strategies intended
to strengthen and diversify the revenue base
of the airport.

Shorter Term Contracts

Deregulation appears to have hastened a trend
toward shorter term airport use agreements that
was already under way prior to 1978. Shorter
term contracts give airport operators greater flexibility to adjust pricing, investment policies, and
space allocation to meet shifting needs in a deregulated environment. For example, several airports with long-term use agreements in force have
given much shorter term agreements to air carriers that have begun serving the airport since
1978. Contracts for such recent entrants often run
for 5 years or less, and they may take the form
of yearly or even month-to-month operating
agreements (similar to those used for air taxi and
commuter operators). At least 15 percent of the
large and medium airports surveyed by CBO have
granted new carriers such relatively short-term
terminal leases and/or use agreements. Moreover,
as existing long-term use agreements expire, many
airport operators indicate an intention to negotiate shorter term use agreements with all carriers
serving the airport. At least a dozen of the airports surveyed by CBO either have recently concluded shorter term agreements or anticipate that
new use agreements (planned or in negotiation)
will be significantly shorter than ones now standing. In part, this reflects the fact that many postderegulation agreements have not involved major capital development programs requiring longterm bond financing.
Many airports also report that, as old contracts
expire, they are routinely shortening the terms of
nonairline leases and contracts with concession-


136

Airport System Development

aires. Some are also moving to more frequent adjustment of rates and charges under existing agreements to meet the escalating costs of airport
operation.

better able to assume the financial risks of airport

operation without relying on break-even guarantees by the airlines, and they may maximize
revenues by adopting a compensatory approach.

Modifications of Residual=

Maximization of Revenues
No matter how they approach financial management, many commercial airports are now seeking to increase and diversify their revenues by a
variety of strategies. These include raising existing
fees and rental rates, seeking more frequent adjustment of charges, using competitive bidding for
concessionaires contracts, increasing the airports
percentage of gross profits, and exploiting new
or untapped sources of revenuee.g., videogame
rooms, industrial park development, and leasing
of unused airport property. Some airports are
looking to future possibilities, as well. For example, two large airports that recently renegotiated
airport use agreementsChicago OHare and
Greater Pittsburgh International-included clauses
in the new contracts protecting the airports right
to levy a passenger facility charge (or head tax)
if and when Federal law permits. In general, this
effort to diversify and expand revenue sources
reflects the paramount importance of a guaranteed
stream of income to assure an airports financial
success.